Negotiators Wrangle on Taxes

In Private Meeting, White House Pushes for Changes in Deductions, Subsidies

WSJ Global Economics Editor David Wessel reports President Obama has joined the battle over the federal debt. Congress has until August 2 to reach an agreement allowing i to raise the $14.29 trillion debt ceiling. AP photo.

By

Naftali Bendavid And

Carol E. Lee

June 28, 2011

With time running short to reach a deal to avoid a government default, President Barack Obama met privately Monday with Senate leaders in hopes of resolving an impasse over whether to include tax increases in a deficit-reduction agreement.

The White House argued that the deficit can't be significantly cut without eliminating tax breaks for certain wealthy individuals and companies, while Republicans said doing so would cripple the economy.

"Democrats and Republicans don't have to look hard to find common ground—we only have to be willing to admit it when we see it," Senate Majority Leader Harry Reid said after his meeting with the president.

But Senate Minority Leader Mitch McConnell (R., Ky.), before meeting privately with Mr. Obama, said all Americans would recoil at the prospect of tax increases, especially during a weak recovery. "Not only are they counterproductive from the standpoint of an economic recovery, they're also politically impossible," he told the Senate.

The two sides are aiming to reach a deficit reduction agreement that could pave the way for Congress to raise the $14.29 trillion federal borrowing limit by Aug. 2. Republicans want significant spending cuts and Democrats say a deal must also include revenue increases.

Hitting the Ceiling

White House spokesman Jay Carney provided the most specific list so far of the tax changes Democrats want. These include a repeal of oil and gas subsidies, an acceleration of the depreciation on private jets, a limit on deductions for the wealthy, and a change in how businesses value their inventory.

The shape of a final budget deal could depend on which side wins the public relations battle on taxes, and whether voters see any changes as fair or burdensome. Democrats plan to highlight tax breaks they believe help their case, beginning with the favorable treatment of private jets.

ENLARGE

President Obama, speaking at the White House Monday, wants tax-law changes that boost revenue.
European Pressphoto Agency

"Do we perpetuate a system that allows for subsidies in revenues for oil and gas, for example, or owners of corporate private jets, and then call for cuts in things like food safety or weather services?" Mr. Carney said.

A bipartisan group of lawmakers led by Vice President Joseph Biden had agreed on cuts that total about $1 trillion over 10 years, participants say. They were shooting for about $2.4 trillion in deficit reduction, but when Democrats insisted about $400 billion in tax increases be considered, the Republicans walked out.

"It would be the worst medicine possible for our ailing economy," said Sen. Jon Kyl (R,. Ariz.), one of the Republican negotiators.

More

Among Democrats' revenue proposals is a change to a common method for valuing businesses' inventories called last-in-first-out, or LIFO.

Under this method, manufacturers can estimate the cost of the goods they've sold at their most recent market prices, even if they purchased the goods at lower prices. An oil company could value the oil it sells at roughly $100 a barrel, for example, rather than $80 a barrel as it may have cost several years earlier. Being able to calculate higher expenses makes a company's taxable income smaller.

Democrats are proposing to increase the amount of income subject to tax, a move fiercely resisted by many businesses.

Another Democratic proposal would limit the itemized deductions that wealthier Americans can claim on their tax returns to a certain percent of their income. Depending on how strict the limit is, that could generate $300 billion more revenue over 10 years.

Democrats are also pushing to end oil company subsidies and ethanol tax breaks, though the ethanol subsidy is already scheduled to end this year.

Democratic leaders also are targeting repeal of the carried-interest break for investment-fund managers, despite repeated failures to eliminate it in recent years. The break allows managers of hedge funds, private-equity funds, venture-capital funds and some others to pay the 15% income tax rate applied to investment income, rather than higher income tax rates. This time around, in order to maximize the issue's political appeal, Democrats are likely to target hedge-fund managers, while sparing other beneficiaries.

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